Thursday, 19 April 2012 - 20:00

 

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PSG ? More than the Sum of its Parts?

PSG Group Ltd released its annual results for the financial year ended 29 February 2012 on Monday, once again reporting some strong numbers and hinting at promising opportunities for further growth on the horizon.

PSG Group is an investment holding company with stakes in 39 underlying investments, including three companies separately listed on the JSE. PSG has its roots in financial services and as a result has a large exposure to the financial services, retail banking, and private equity sectors, but recently also ventured into agriculture and education. The company’s market capitalisation currently stands at approximately R 9.5bn.

Recurring headline earnings per share improved by 27.6% to 308.6 cents per share, while the dividend for the year increased by 22.4% to 82 cents per share. The Sum-Of-The-Parts (SOTP) value per share, which is explained below, has increased by 19.4% to R 55.92.

By the nature of its business, which is purchasing companies and unlocking their intrinsic value, it is unlikely that PSG will ever have a massive dividend yield and more likely that it will instead aim to reinvest as much of its profits as possible into new investment opportunities. Therefore, an essential valuation tool to value PSG is the Sum-Of-The-Parts (SOTP) value per share. The SOTP value per share metric looks through to an investment company’s underlying holdings and then calculates what the share should be worth in the market, based solely on the underlying holdings.

An extract from PSG’s financial statements shows the contribution of the underlying investments to PSG’s asset value and SOTP value per share:

Source: www.psggroup.co.za

PSG has also issued an updated SOTP value per share of R 61.66 as of 4 April 2012, which amounts to a further increase of 10.26%. The share price currently hovers around the R 53 - R 55 range, indicating a discount to SOTP. From the graph below it can be seen that the share price remains relatively close to the SOTP over time, although a discount has been in place for the past three years or so:

Source: www.psggroup.co.za

We will now have a brief look at the performance of two of PSG’s underlying investments that are also listed separately on the JSE, namely Capitec Bank and Curro Holdings.

Capitec Bank (32.5% Holding)

Capitec has taken the lower income market in the retail banking sector by storm, and has grown rapidly to a point where it currently employs over 7,000 people, has 3.7m active clients and a market capitalisation in excess of R20bn.

Capitec have delivered a return of 29% on ordinary shareholder’s equity, which is slightly lower than 2011’s figure of 35%. Understandably such high RoE figures are difficult to maintain in an environment where other banks are trying their utmost to capture a share of the lower income market. Capitec achieved headline earnings of R 1.08bn for the financial year, with headline earnings per share increasing by 49% to R 11.25.

Capitec is vitally important to PSG’s future success as it comprises 50% of PSG’s asset value. PSG CEO Piet Mouton attributes much of Capitec’s phenomenal growth to their management team, which has been in place since the company’s listing. He further displays confidence in their ability to grow the business’ client basis even further and to remain profitable going forward.

Curro Holdings (63.1% Holding)

Curro Holdings comprises about 9% of PSG’s asset value, and has enjoyed a lot of media attention since listing on the JSE AltX in June 2011. The excitement among PSG enthusiasts can be attributed to the company’s interesting business model of developing, acquiring, and managing private schools in South Africa, as well as the believed upside potential waiting to be unlocked.

Curro has expanded its number of schools countrywide from 3 to 16 since 2009, while the number of learners has increased from 2,000 to over 10,500 at present. This expansion came at quite a cost, with R 142m spent on the development of four new school campuses and a further R 80m to upgrade and expand their existing schools. As a result of all this capital expenditure, Curro reported a headline loss of R 7.5m for the financial year ending 31 December 2011, compared to a profit of R 5.2m reported for the previous year.

PSG cautions that Curro is still in its capital expenditure phase, which will be costly and capital intensive over the short to medium term. However, management believes that their long term growth strategy will unfold with very favourable results once the foundations are in place.

PSG has been a brilliant performer over the years, and has a strong management team in place, but as we mentioned last week one needs to ensure that a good company remains a good investment before making a capital allocation.

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Kind Regards,

Cor van Deventer
info@seedinvestments.co.za
www.seedinvestments.co.za
021 9144 966

Thu, 19 Apr 2012

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